GeneralFinancial Glossary
Compounding Frequency
Definition
The number of times per year that interest is calculated and added to the principal. Common frequencies include annual (once a year), semi-annual (twice), quarterly (four times), monthly (twelve times), and daily (365 times). More frequent compounding produces higher effective returns on the same nominal interest rate.
Why It Matters
A 10% annual interest rate compounded annually yields 10% effective return. The same rate compounded quarterly yields approximately 10.38%, and daily compounding yields approximately 10.52%. For FDs, most Indian banks compound quarterly. For savings accounts, interest is calculated daily but credited quarterly. Understanding compounding frequency is essential when comparing FD rates across banks.